Working Paper: NBER ID: w1544
Authors: Joe Peek; James A. Wilcox
Abstract: This paper investigates empirically the effects of personal and corporate taxes on taxable interest rates and on the spread between taxable and tax-exempt rates. Two main sets of results emerge. First, we establish that the effective marginal investors in the Treasury bill market are households, as opposed to tax-exempt institutions or corporations. We find no evidence of corporate tax rate effects on Treasury bill yields. The study is then extended to an examination of the tax-exempt market. The results there contradict the hypothesis that commercial bank arbitrage generally ensures that the taxable-tax-exempt interest rate spread is determined by the corporate tax rate. Our estimates decisively reject the corporate in favor of the personal income tax rate as being the relevant tax rate of the marginal investor in this market as well.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal income tax rates (H24) | taxable interest rates (E43) |
| corporate tax rates (K34) | taxable interest rates (E43) |
| personal income tax rates (H24) | spread between taxable and tax-exempt rates (E43) |
| corporate tax rates (K34) | spread between taxable and tax-exempt rates (E43) |